topic 2 - conceptual framework standard setting process.ppt

MAB4013 ACCOUNTING FRAMEWORK MAC4013 ACCOUNTING FRAMEWORK

TOPIC 2TOPIC 2

CONCEPTUAL FRAMEWORK & CONCEPTUAL FRAMEWORK & STANDARD SETTING PROCESSSTANDARD SETTING PROCESS

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Learning Objectives:

• The need for conceptual framework• Issued faced by the national standards setter

in adopting a conceptual framework premised on the international accounting framework

• Participation in international standard setting process

TOPIC2-CONCEPTUAL FRAMEWORK & STANDARD SETTING

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Conceptual Framework (CF)

• A conceptual framework is a formal set of interrelated concepts specifying the function, scope and purpose of financial accounting and reporting

• In Malaysia, MASB conceptual framework is similar to the Framework for the Preparation & Presentation of Financial Statements issued in July 1989 by the IASC.

TOPIC2-CONCEPTUAL FRAMEWORK & STANDARD SETTING

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Needs for CF

• It is as a devise to provide a boundary within which accounting standard setters can operate.

• Given the political nature of accounting standards, a CF provides standard setters a coherent understanding of the elements of the financial statements and an explicit value position taken with respect to the objective of financial reporting and primacy of investor-user group.

• It provides a basis for supporting the standard setters, viewpoints or conclusions.

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Conceptual Framework Consists of 7 SFACs (Statement of Financial Accounting Concept)

TOPIC2-CONCEPTUAL FRAMEWORK & STANDARD SETTING

Objectives of Financial Reporting by Business Enterprises 19781

Qualitative Characteristics of Accounting Information 19802

Elements of Financial Statements of Business Enterprises 19803

Recognition and Measurement in Financial Statements 19845

Elements of Financial Statements 19856

Objectives of Financial Reporting by Nonbusiness Organizations 19804

Using Cash Flow Information & PV in Accounting Measurements 20007

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Conceptual Framework

TOPIC2-CONCEPTUAL FRAMEWORK & STANDARD SETTING

OBJECTIVES

QUALITATIVE CHARACTERISTICS

ELEMENTS

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Conceptual Frameworks

• It is interrelated structure of propositions and observations that provides a logical foundation for deducing what accounting principles ought to be.

• 2 presumptions are: CF has a normative purpose – it is intended to provide

a basis for determining what accounting principles ought to be

It is a logical foundation – involving process of deduction or reasoning forward within a rational structure of propositions and evidence – This supports the view that accounting may be at least more of an applied science rather than art and its conceptual basis much more than a generalization of existing conventions and practices.

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Objectives of CF

• The CF begins with the objectives of financial statements and elements to be reported. It includes: The user information needs Qualities of useful information Concepts on recognition and measurement

• The main objectives of CF: Assessment of management stewardship Decision usefulness Promotion of Social Welfare

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Qualitative Characteristics

• 4 key qualities: Understandability Relevance

Feedback value Predictive value Timeliness Materiality

Reliability Representational faithfulness - substance over form & prudence Verifiability Completeness Neutrality

Comparability - ConsistencyTOPIC2-CONCEPTUAL FRAMEWORK & STANDARD SETTING

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Underlying Assumptions & Influences

Qualitative Characteristics

Assumptions Influences

•Accrual Basis •Going Concern

•Periodicity

Balance between:•Qualitative Characteristics

•Benefit and Cost

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Universal CF?

• In moving towards convergence and global standards, it appears that a universal CF may be appropriate.

• However this would means that the needs of smaller entities need to addressed with a differential reporting framework.

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Evolution of the Conceptual Framework

• Working Group 1: Conceptual Framework Evolution of the conceptual framework Influences that have impacted the contemporary conceptual

framework

• In the Western civilisation accounting has been widespread for over 600 years.

• Need theory of accounting?• 20th centuries – termed as GAAP• Professional accountants, government agencies

codify such principles• Create independent and representative committee• Standard setting bodies

TOPIC2-CONCEPTUAL FRAMEWORK & STANDARD SETTING

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Influences on the development of CF

• The influences that impacted development of the CF include: the US experience, the needs of the capital markets, research drawing from efficient market literature

that impacted the thinking behind the CF and moving on the convergence initiative between the

USA and IASB will see renewed interest in aligning the FASB framework with that of the IASB.

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IASB Conceptual Framework

• Predecessor – IASB• In 1973, IASC was formed

Objective: harmonising the accounting principles used by businesses and other organisations for financial reporting

Exposure Draft published in May 1988. Final version: was issued in July 1989

Framework for the Preparation and Presentation of Financial Statements

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Issue: IASB Conceptual Framework

• In the light of current initiatives to expand responsibility of the reporting entity to environmental issues and corporate social responsibility reporting, it appears that moves are for the broadening of

responsibility to include the biosphere as well. • The narrow focus of the CF may need to be

readdressed to incorporate the societal responsibilities of reporting entities. This is happening in the more developed countries

such as Sweden where investors groups demand for such responsibility to be placed on the corporations.

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MASB Discussion Paper

• MASB was established Working Group 1: Conceptual Framework A Discussion Paper DP1, Framework for the

Preparation and Presentation of Financial Statements was issued in July 1998.

Did revise but a final statement has yet to be issued.

• Main Issues: Accounting Issues & the Environment Islamic Perspectives Capital Maintenance v Transaction Approach Performance Reporting

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Differential reporting

• Evolution in the Direction of Convergent Standards

• Defining the Reporting Entity• Exempt Enterprise and Differential Reporting

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Proposed MASB Framework: The Way Forward

• A fully developed and clearly stated, CF closely related to the information needs of capital markets.

• Further develop the framework for differential reporting for exempt enterprises.

• Islamic perspective may be applied to account for and report transactions that in line with the Shari’ah (Islamic law).

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FASB’s Standard-Setting Process

1. Identify problem

2. Form task force

3. Produce discussion memorandum

4. Circulate to interested parties

5. Convene a public hearing

6. Issue exposure draft and request comments

7. Consider written comments

8. Another exposure draft or a final vote is taken by the board

9. 4 of 7 votes needed to issue a standard (2002)

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Participation in International standard setting process (pg 157)

• IASB comprises individuals with different background: 5 practising auditors (eg. UK, France, Canada,

Japan) 3 preparers (Germany, Switzerland) 3 users of financial statements (UK) 2 others (liaison for national standard setters – US,

Aussie/NZ) 1 academic (part-time)

• Standard Advisory Council (SAC)

TOPIC2-CONCEPTUAL FRAMEWORK & STANDARD SETTING

MAB4013 ACCOUNTING FRAMEWORK MAC4013 ACCOUNTING FRAMEWORK

End of Topic 2End of Topic 2